Republicans and Democrats shouted across each other in a heated Senate Finance committee hearing debating the tax bill overhaul. The Senate version of tax bill was approved and sent to the full Senate after four days of often fierce partisan debate. (Nov. 17)
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A new inflationary measure could stymie Social Security's annual cost-of-living adjustment.

Dice next to a piece of paper that reads, Will Your Social Security Be Enough.(Photo: Getty Images)

Without a guaranteed monthly stipend, the number of seniors living below the federal poverty level could well rise by millions. In fact, the Social Security Administration (SSA) reports that 34% of elderly Americans receiving benefits relies on Social Security for 90% or more of their monthly income. Stats like these are why Social Security is so important, and why current and future retirees are eager to see this critical program protected.

But this "financial rock" is primed to face some serious obstacles in the years to come. The most recent annual report from the Social Security Board of Trustees estimates that it'll begin paying out more in benefits than it's collecting in revenue by 2022. Just 12 years later, in 2034, its approximately $3 trillion in asset reserves will be completely depleted. To continue making monthly payments through 2091, the Trustees believe an across-the-board cut to benefits of up to 23% may be needed.

That's a pretty terrifying outlook for current and future retirees. Yet it's far from the only thing they have to worry about. According to the language of the House Republican tax bill, officially known as the Tax Cuts and Jobs Act, Social Security beneficiaries could see even smaller raises in subsequent years if the bill becomes law.

How Social Security's cost-of-living adjustment is currently calculated

Generally speaking, Social Security beneficiaries get "Christmas" in mid-October every year. Mid-October is when the Bureau of Labor Statistics announces September's inflation data, and the SSA calculates out how much of a "raise" Social Security beneficiaries will get in the upcoming year. This raise is known as the cost-of-living adjustment, or COLA.

The current tether that measures inflation for Social Security is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The average reading from the third quarter of the previous year (July through September) serves as the baseline number, while the average reading from the third quarter of the current years acts as the comparison. If the average price of the goods and services measured by the eight major spending categories of the CPI-W have risen year over year, beneficiaries get a raise that's commensurate with the percentage increase, rounded to the nearest 0.1%. If prices fall year over year, benefits remain static the following the year. Thankfully, they can't drop due to deflation.

In most years, beneficiaries receive a raise. However, three of the past eight years have resulted in year-over-year CPI-W declines, and thus no COLA. The recent history of COLA has been especially disappointing to seniors, considering Social Security income has lost 30% of its purchasing power since 2000, according to an analysis by The Senior Citizens League.

But if the GOP tax plan becomes law, the purchasing power of Social Security dollars could take an even bigger hit.

(Photo: Getty Images)

The Republican tax plan is a potential threat to your Social Security COLA

Unveiled a few weeks ago, the House Republican tax plan aims to replace the standard inflationary measure, the Consumer Price Index (CPI) for all Urban Consumers, which is used in calculating a number of tax provisions, with the Chained CPI.

The Chained CPI and other inflationary measures, like the CPI-W, are actually pretty similar. There is, however, one pretty big difference in how they measure inflation. The Chained CPI takes into account the idea of substitution, or the act of switching to a lower-cost good or service if another becomes too expensive. Republicans argue that substitution factors in genuine consumer biases if goods or services become too pricy and is therefore a better measure of inflation than the standard CPI, which does not factor in substitution.

Now here's where things get a bit tricky -- and vague. The Tax Cuts and Jobs Act would switch inflationary measures to the Chained CPI beginning in 2023. But once again, we're talking about tax provisions. Social Security benefits aren't tax provisions. Nevertheless, the language of the bill would allow for the GOP to perhaps take a broader view of inflationary provisions and apply the Chained CPI to Social Security's COLA, which is something they've been wanting to do for a long time. If the Chained CPI were used in place of the CPI-W, beneficiaries can expect even smaller COLAs in the future. But if there's a bright side to this, smaller COLAs could potentially extend the length of time before Social Security's asset reserves are depleted.

(Photo: Getty Images)

And that's not all. The GOP tax bill proposes utilizing the average Chained CPI reading over a 12-month period, ending Aug. 31, as opposed to just the third-quarter average reading for the CPI-W. Natural disasters like hurricanes that shut down refiners and affect fuel supply have been known to boost COLAs during the third quarter. In fact, hurricanes Harvey and Irma are most directly responsible for the 2% raise beneficiaries are receiving in 2018. Removing this occasional third-quarter bump and moving to a full-year measure could pressure COLAs even more.

Nothing is written in stone

However, working Americans and current retirees should keep something in mind. Namely, there are no guarantees that the GOP tax bill passes in its current form, or that the Chained CPI measure will make its way into a final bill. Even if the Chained CPI provision does make it into the final bill, there's again no guarantee that it'll be tethered to Social Security benefits.

There's a lot left to be hashed out on Capitol Hill with tax reform, but this initial draft is enough to put Social Security beneficiaries on alert that their purchasing power has the potential to be negatively affected by the Republican tax bill.

CLOSE

Vice President Mike Pence spoke to the Tax Foundation's 80th annual dinner in Washington, after the House voted Thursday to approve a $1.5 trillion overhaul of the nation's tax code. Pence says "now the ball is in the Senate's court." (Nov. 17)
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